While the measures announced by RBI to open a swap window to attract FCNR-B dollar funds can help augment capital inflows and cushion the funding pressures to some extent in the near term, India’s balance of payments remains as vulnerable as ever

Yesterday, Raghuram Rajan took over as the governor of the Reserve Bank of India (RBI) and announced various measures. According to brokerage firm Nomura, the main positive policy announcement for the Indian rupee in the RBI governor Rajan's speech was that the central bank would offer a swap window to banks for new foreign currency non-resident (B) dollar funds (3-year maturity and above) at a fixed annual rate of 3.5%. This scheme is expected to be open until 30th November and could lead to an estimated $10 billion of inflows. Of course, while this will substantially help fund the current account deficit, Nomura remains skeptical about any sustained rally in the rupee because of the continued poor fundamentals from weak growth to the fiscal and current account deficits. There could be more ad hoc measures to support the rupee in the near term through to the 20th September monetary policy meeting. The risk is that market expectations remain high, remarks Nomura.

According to Morgan Stanley, while the increase in real rates will help to narrow current account deficit (CAD) over the next four to six months, in the interim, India will remain exposed to funding risks.

"In order to manage the near term funding risks, we have been highlighting the need to augment capital flows through a special scheme of non-resident Indians (NRI) dollar deposit (with the government bearing part of the FX risks) which can raise about $20 billion. The measures announced by RBI are somewhat similar in nature and can help augment capital inflows and cushion the funding pressures to some extent in the near term," the investment bank and financial services provider said in a research note.

According to the report, the indicators to watch to assess funding risk for India are (a) Monthly trade deficit, (b) CPI inflation (c) measures to augment capital inflows and (d) US 10Y yields and US trade weighted dollar index.

Swap window for FCNR deposits:

Under the FCNR scheme, NRI are allowed to hold deposits in foreign currency, thus avoiding exchange rate risks. On 14th August, the RBI had liberalized the interest rate on FCNR deposits (for three to five year maturity) to LIBOR/swap plus 400 bps from LIBOR/swap + 300bps.

According to the RBI, banks had requested it to consider a special concessional window for swapping FCNR deposits that will be mobilized after interest rate liberalization. The RBI thus announced the offer of such a window to the banks to swap the fresh FCNR (B) dollar funds, mobilized for a minimum tenor of three years and over at a fixed rate of 3.5% per annum for the tenor of the deposit.

How will it work?

The RBI is trying to provide FX cover to banks at a reasonable cost so that they can collect dollar deposits in normal course and convert them into rupees using this FX cover. The RBI will provide the cover at 3.5% p.a., well below current market hedging costs of about 7%. For banks, the cost of deposits in rupee terms (including hedging costs) will be equal to around 9% (3Y-5Y LIBOR swap is at 0.99%-1.84% + 300bps and hedging cost of 3.5%). This will largely be close to onshore rupee deposit rates (SBI deposit rate is running at 8.75% for 1Y-10Y maturities).

The aim of these measures is to augment dollar flows:

Morgan Stanley said as it has been highlighting, significant currency pressures bring a need to raise NRI dollar deposits through a special scheme under which the government bears part of FX risks. The announcement by the RBI will help in part to augment the NRI dollar deposits. "Currently $15 billion is outstanding under the FCNR deposits, we believe with this measure an additional $5-$10 billion could be raised. Moreover, some additional dollar flows could be raised by banks borrowing overseas, post the announcement," it added.

To improve capital flows and ease the pressure on rupee, the RBI governor has also announced that he will initiate steps to give exporters and importers greater flexibility in their risk management:

(a) exporters will be permitted to rebook cancelled forward exchange contracts up to 50% (from 25% presently) of the value of cancelled contracts

(b) to provide a similar facility for importers up to 25% (from 0% currently).

Amid the current gloom, the new governor has infused a sense of optimism that he is in charge and that the RBI under him will unleash more financial sector reforms, a medium-term positive for the economy, says Nomura. In the near term though, this doesn't take away from the fact that the economy continues to face multiple pressures from a vulnerable external sector and a weak growth outlook. Nomura retains its negative outlook on the economy over the next 3-6 months with an eye on the next policy meeting on 20 September for greater policy clarity. The measures announced by the RBI can help augment capital inflows and cushion the funding pressures to some extent in the near term. Beyond that, according to Morgan Stanley, the indicators to watch to assess funding risks include:

(a) Monthly trade deficit,

(b) CPI inflation

(c) Measures to augment capital inflows and

(d) US 10-year yields and US trade weighted dollar index.

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Ramesh Poapt

3 years ago

Pretty technical micro presentation leading to macro impact! Good presentation if not advanced!Insight deepens ones knowledge on such real n crucial matter!I must complliment Moneylife being first and hopefully not the last! Pl...keep it up!

Coal India could explore the possibility of buying wagons from the Indian Railways, and forge a mutually beneficial partnership that could lead to long-term benefits

For the aam aadmi, the best and the cheapest means of transport is none other than the ones provided by the Indian Railways, who is supposedly India's largest employer, having a network covering over 65,000 kms, operating roughly 19,710 trains and ferrying 23 million passengers a day!

The Railways play a vital part in the movement of goods, both raw and finished, reasonably efficiently, on time and comparatively cheap.

The Indian coal industry depends upon the Railways to be able to move wagonloads of coal from pitheads to consumer sites. These are carried in specially made wagons, which are manufactured by Texmaco Rail, Titagarh Wagons, Cimmco and a few smaller units like Burn and Jessops. These builders also make special purpose wagons and tanks for corporate bodies.

Although the wagon builders received reasonable quantity of orders from Railways, the last order received was for 17,000 units way back in 2011-12 and to utilise their installed capacity, they have secured overseas orders, for various types of wagons, from Vietnam, Uganda, Senegal, Zambia to name a few. Yet, they have spare capacities that go waste.

The Railways have always played an important role in the development of the coal industry. For one thing, they are already building dedicated corridors for swift and guaranteed movements of coal; they are connecting links to ensure safe and timely arrival of wagons to receive imported coal, as indigenous production has to be supplemented as it is not adequate to meet the demand.

This is where Coal India can take one major step by placing substantial orders for wagons for delivery to Railways, on their account, which, the latter can make available at their beck and call. This will also reduce the financial strain on the part of Railways and, in return, they could offer concessional freight rates for movement of coal. Such a deal will be mutually beneficial. After all, Coal India has enough cash reserves to take this investment plunge, which has long-term benefits. Once this is successful, Coal India can make additional investments to get wagons made to meet other consumer demands and, with Railways collaboration, get a share in freight!

These wagon builders are also fabricators, and Coal India could have dumb barges made to carry coal where inland waterways exist, in addition to others in the field.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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Dr Anantha K Ramdas

3 years ago

Mr Raghunathan: Thanks for your comments. You have mentioned that CIL cannot or should not invest in wagons until additional tracks are laid. This point is well taken;
but you have mentioned that this
was "considered". What happened afterwards?

The issue that is now gaining importance is the CIL's desire to acquire properties outside but we are running short of foreign exchange. Also, they are planning to reduce the production by 10 Million tonnes while plans are also afoot to import 130/140 million tonnes. CIL's own projection on this means the import bill alone will be some $ 8 - 8.5 billion.
Yes, we may need to import high caloric value thermal coal.

Frankly, as opinions on this subject may differ, the fact remains, it will be in our national interests to break our heads and overcome the problems relating to our own mines, import latest technology and experts, but spend part of the cash reserves in India.

Also more than 50 mt of coal are lying near pitheads and other locations. CIL needs to do what it takes to move these lots.

Frankly, it may be even be practical solution to decentralize the activities and let the subsidiaries be given the freedom to work on their own. From the looks of it, everything depends on HQ and the Ministry of Coal and umpteen organizations for things to move. So, the suggestion of investing in wagons is one of the many that can prove to be helpful. Conditions may have changed, since the last time this issue was considered by CIL.

Finally railway tracks are not used 24 hours a day; a detailed study may reveal that methodical and coordinated approach to the movement problems can ease the situation.
We cannot close our minds, but let us throw up ideas and let specialists work on them to find a solution. Do you agree?

V Raghunathan

In Reply to Dr Anantha K Ramdas3 years ago

As far as the comment " We cannot close our minds, but let us throw up ideas and let specialists work on them to find a solution" it is fully agreed.

It is seen that in public domain CIL is always blamed for both not producing to the desired extent and for not moving coal to the desired extent. The reality that delays in production is beyond the control of CIL mainly due to issues of statutory clearances and land acquisition related issues is entirely overlooked.

Similarly the efficiency or inefficiency of railways is also overlooked in the context of huge level of coal stocks lying in CIL pithead. Only CIL is blamed in public domain and not railways the monopoly bulk carrier for this.

As long as major developments take place for improving coal transportation logistics, and for timely resolution of statutory clearances and land acquisiton related issues, breaking up of CIL or privatisation of CIL or other similar suggestions may not be fruitful.

V Raghunathan

3 years ago

The suggestions are not practical. Coal India investing in rail wagons will not make available wagons at its beck and call without any augumentation of track capacity in trunk routes.

Due to this reality, it is understood that CIL / subsidiaries have considered to invest in building track capacity in coal bearing areas thereby establishing connectivity with trunk routes, rather than investing in wagons.

Coal being the largest revenue earner for railways, it is futile to expect any freight rate concession for coal, as long as cross-subsidisation of passenger fares with revenue from freight rates is continued by Indian Railways.